India Passes Constitutional Amendment to Pave Way for Goods and Services Tax

The two houses of the Indian Parliament recently passed an historic bill which aims to enact a common goods and services tax (GST) among the federal and the state governments of the Republic of India.

Necessitating a constitutional amendment (as the original framers of the constitution of India had clearly felt the need to allocate the collection and utilization of different kinds of taxes between the federal and state government and accordingly provided so in the constitution of India), the bill which was conceived and planned two decades ago, and brought into shape by the previous Congress Party headed coalition federal government, was tweaked a little further by the present Bharatya Janata Party (BJP) ruled federal government and was passed more than a year back by the House of People, but was stuck at the House of States since then, finally received the assent of the House of States after a few more amendments were forced by the opposition parties. However much more work needs to be done to bring the single levy of tax into force, as the state governments needs to ratify the constitutional amendment by a two thirds majority and also passing of a federal law giving shape to the actual contours of the Goods and Services Tax Act and also passing of each state’s own GST law. With an eye on the implementation of the GST on the commencement of the next financial year i.e. 1st April 2017, the government machineries both at the state and federal level needs to run a marathon within the time frame of a sprint race to achieve this deadline. But a later effective date cannot be ruled out if there are any unavoidable delays.

But the GST is not all cheers to the industry of India as well as the common man. Not to the common man because GST is a destination bound tax and is levied on every sale from the factory gates to the final doorstep of the common man who consumes the goods so produced or services availed and as such is expected to burden him. Again not to the industry because it is still not a single levy as it was expected to be and further it is expected to increase the compliance burden of the industry which is already bogged down by endless reams of paper work, which can only be reduced if the implementation agencies comes up with a seamless integrated information technology platform operated online for claiming input credit of GST paid to utilize the same against GST payable.

The biggest disappointment is the fact that GST does not subsume all indirect taxes and levies as it was originally thought to be. For example import duties (basic customs duty or BCD) will be continued to be levied separately, but it will be eligible for Input Tax Credit (ITC) for a manufacturer who uses the imported goods as raw material for his manufacturing process. Also a plethora of taxes levied by the state governments i.e. professional tax, entertainment tax etc. may not be subsumed by the levy of GST. Further GST is not just GST. It is actually three levies – CGST (Central GST), SGST (State GST) and IGST (Inter State GST). 

Another problem area is levy of GST even among the units of a same company. For example, if a manufacturer in one state sends the goods to its own warehouse in another state, though this transaction is not a sale, GST is levied on the movement of goods, though ITC can be availed by the warehouse unit. However since the transaction is not a sale and is not carried out at arm’s length basis, the valuation of the transaction between the same units of a company and GST applied thereon can be called into question by the law enforcement authorities leading to disputes on the issues of transfer pricing. How quick will the ITC be available for adjustment against payment of taxes is yet another problem area because the person from whom you have purchased the goods and paid GST thereon, has to actually deposit the GST with the government and show up in the records as credited against your name, only after which you will be eligible to obtain input credit and adjust the same against your payment of GST to the government in the next chain of the transaction. Not to mention that certain goods are out of the purview of the GST rates even before the start, namely, crude petroleum, motor spirit, diesel, aviation turbine fuel and natural gas. 

The exact rate of GST against all the three categories is still being guessed. One hopes that the states in their zeal to earn more revenue to meet their never ending populist measures would not begin tampering with a uniform rate of GST which is sought to be applied against a commodity all over India. 

Yet GST is a path breaking change in the indirect taxes horizon of India. Earlier a trader or a manufacturer or a service provider was unable to adjust VAT, excise duty or service tax against each other as the case may be. Further there were other levies such as cess which was imposed at will to achieve a goal – Swach Bharat Cess for clean India, Krishi Kalyan Cess for the alleviation of the woes of the farmer. All these will now be history. 

India Inc. has hailed the passage of the constitutional amendment as GST is expected to achieve uniformity in taxes across territories irrespective of the place of manufacture or distribution. It is also expected to bring about a better tax compliance among several medium and small traders as any tax evasion will not be beneficial to them. The final GST law when passed is also expected to define the small trader or manufacturer who will be exempted from compliance. Upon successful implementation, GST is expected to boost India’s GST by 2% and also make business more competitive to manufacturers in India.